SEK was our favored currency in the latest Currency Strategy and over the past 5 weeks EUR/SEK has fallen more than 4%. We continue to expect a stronger SEK over time but EUR/SEK has now moved beyond our Q3 target and the move lower looks a bit overdone short-term.
Riksbank meeting next week is unlikely to move SEK much in any direction, most probably the ECB meeting the following day is more important where we expect no change from the ECB also supporting a short-term bounce higher in EUR/SEK. NOK on the other hand has not benefited to the same extent as commodity prices have seen a rather abrupt collapse in May/June. Before the more significant rise in FX purchases later this fall (which is most likely to push EUR/NOK towards 7.60 or above) there is scope for some NOK trade-weighted appreciation again near-term.
NOK/SEK has also recently moved lower as Norwegian 2y rates have dropped while its Swedish counterpart has increased, compressing the yield differential significantly in recent days. Although Swedish rates continue higher today the Norwegian 2y yield is currently trading on record lows and considering the strength of the domestic economy it is difficult to see it continue much lower from current levels. In addition the traditional relationship between relative domestic demand illustrated by relative strength in retail sales and NOK/SEK indicates a continued upward pressure towards the 1.20 level from the relative strength of the domestic demand, although this relationship has been weaker lately.
With risk appetite currently improving after last nights proposals from euro leaders which traditionally tends to support SEK more than NOK (as shown below). However, over the last month the correlation between SEK and risk appetite has eased significantly and currently we actually have the opposite situation, where correlation between NOK and risk appetite is stronger than between SEK and risk appetite. Hence, this should not have the same impact today.
Therefore given the recent collapse in NOK/SEK in combination with our revised higher range for NOK/SEK (now likely to trade 1.15-1.20) we see a short-term opportunity to go long the cross.
Recomendation: Buy NOK/SEK here with a stop on a daily close below 1.1550.
SEB